Should You Buy Nvidia Stock for Its Mellanox Deal?

Nvidia said it is buying Mellanox, which makes ethernet-switching fabric for data centers, for $6.9 billion in cash

Nvidia (NASDAQ:NVDA), best known for gaming chips, made a major turn to the cloud by agreeing to buy Mellanox Technologies (NASDAQ:MLNX), which sells internal ethernet systems to data centers, for $6.8 billion.

Should You Buy Nvidia Stock for Its Mellanox Deal?
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Nvidia said it is paying $125 per share in cash for Mellanox, which closed Friday at about $109. Mellanox is currently trading just around $119. Nvidia’s management said the deal will immediately add to its non-GAAP gross margin, earnings per share and free cash flow.

Mellanox is based in Israel. The deal is expected to close by the end of the year. Investors seemed to cheer it, bidding Nvidia shares to over $152 in pre-market trade March 11.

Outbidding Intel

In addition to uniting a leader in high-performance computing with its communications doppelganger, the deal also represents Nvidia’s entry into the big leagues of computing.

The deal came together over the weekend, and Nvidia reportedly outbid rivals like Intel (NASDAQ:INTC) and Xilinx (NASDAQ:XNLX) for Mellanox, which had just crossed the $1 billion/year sales threshold last year. Microsoft (NASDAQ:MSFT) had also reportedly shown interest in Mellanox in December.

Nvidia CEO Jensen Huang had not been known for big deals. The company’s biggest acquisition prior to this was Icera, bought in 2011 for $367 million. But Huang moved quickly, reportedly bidding $1 billion more for the Israeli startup than Intel had offered just a month before.

Mellanox technology has applications in self-driving cars, and even in gaming computers, but its primary niche is in cloud data centers, where its InfiniBand technology is used to connect computer clusters.

The deal will let Nvidia offer clouds more complete upgrades, combining both the fast graphics chips and communications relays needed to deliver artificial intelligence and Big Data applications.

Should You Buy Nvidia Stock

The deal will reverse a precipitous slide in Nvidia’s business.

The cryptocurrency crash hit Nvidia hard, as its fast graphics chips had become a favorite of crypto miners. The boom made its GeForce graphics cards too expensive for many gamers, who cheered the end of the boom as an opportunity to get such cards for less. Nvidia’s efforts at the January Consumer Electronics Show (CES) show were geared to renewing its relationship with those buyers.

Still, quarterly sales fell in January to $2.2 billion from almost $3.2 billion the previous quarter, and shares in the fabless chipmaker had fallen even harder, from $280 per share as recently as Oct. 1 to a low of $131.60 as recently as January. Analysts who had previously nicknamed their dogs for the company were calling the stock a dog.

The deal will nearly wipe out Nvidia’s cash balance, which stood at $7.4 billion at the end of January, but it has plenty of borrowing capacity, having acquired less than $2 billion in long-term debt on assets of $13.3 billion. Add Mellanox’s December quarter sales of $1.08 billion to those of Nvidia and it’s even ahead of its October quarter sales pace.

Bottom Line on NVDA

This is a very big deal for Nvidia. It solidifies the company’s niche in high-performance computing. It also dents Intel’s business in cloud data centers, where its cheap processors were considered essentials.

But as both public and private clouds look to upgrade for new, faster applications, they’re now likely to turn not only to Nvidia’s chips, with Mellanox communications support, but its software as well. Most analysts had held their buy recommendations in place as Nvidia stock took its hideous late-year fall. Their patience is now likely to be rewarded.

Expect this stock to now rise from its dog bed and bark.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT.


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/buy-nvda-nvidia-stock-mellanox-deal/.

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